09/02/2015 07:03 AST
The strengthening U.S. dollar is rippling through the financial system in unexpected ways, revealing what bankers say is a hidden flaw in a Federal Reserve proposal to increase capital cushions at the nation’s largest banks.
Big U.S. banks say that, under the rule proposed in December, the recent steep rise in the dollar’s value would force some U.S. firms to hold billions of dollars more in capital than foreign competitors, including weaker European banks, because of how the Fed plans to calculate a so-called surcharge levied on the eight most systemically important U.S. banks.
The Fed rule is aimed at forcing big banks to add extra layers of financing to protect against losses. The banks believe it would wind up penalizing U.S. banks if the dollar remains strong against the euro, as many economists expect, because the high exchange rate makes their dollar-denominated assets and operations look larger relative to their European peers.
Officials from banks including Citigroup Inc., Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley met privately with Fed officials in January to discuss the threat and other concerns about the rule, according to people who attended. The banks plan to file an official comment letter later this month detailing those concerns and seeking changes to how the proposal calculates the extra capital required.
The currency’s potential impact on big U.S. banks is the latest example of how a strengthening dollar is affecting the U.S. economy. The strong dollar is hitting the profits and sales of a wide swath of corporate America, including firms that expanded overseas aggressively, like consumer-products giant Procter & Gamble Co. and pharmaceuticals company Pfizer Inc., but are now finding that sales abroad are suffering or not keeping up with dollar-based costs. The impact has weighed on U.S. stocks and raised worries about the health of the U.S. economy.
U.S. banks say the currency volatility exposes underlying problems with the Fed’s proposal, which is aimed at forcing banks to shrink by putting a price on bigness but ties their capital requirements in part to forces beyond their control. Banks have already expressed concern that the Fed’s surcharge proposal is tougher than what European regulators are expected to require.
“It was curious that the Fed, in proposing a new surcharge for U.S. banks, that they would choose to in effect double down on an arguably flawed methodology, especially one that would cause a U.S. bank’s surcharge to increase merely because of the dollar strengthening,” said John Gerspach, chief financial officer of Citigroup, on a Jan. 23 conference call with investors. He said the dollar’s rise against the euro likely meant the bank would face a higher surcharge than many expected when the Fed released its proposal.
In a speech on Jan. 30, Fed governor Daniel Tarullo defended the rule, saying it “should provide substantial net economic benefits by reducing the risks of destabilizing failures of very large banking organizations.”
Fed officials have asked banks and others to detail how the rule should be changed during the comment period, which ends Feb. 28. The proposed rule would phase in starting in 2016 and take full effect in 2019.
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